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Retalix Ltd. (NASDAQ:RTLX)

Q2 2012 Results – Earnings Call

August 8, 2012, 9:00 AM ET

Executives

Shuky Sheffer – CEO

Sarit Sagiv – CFO

Operator

Welcome to the Retalix conference call.

As a reminder, this conference call is being recorded today, August 8, 2012.

Leading the call is Retalix's CEO, Shuky Sheffer. Joining him is Sarit Sagiv, the Company's Chief Financial Officer.

Before I turn the call over to them, I'd like to remind our listeners that management's remarks contain forward-looking statements. These statements include, but are not limited to, comments regarding the guidance and expectations about revenues, DSO, financial income and profitability, expectations about the Company's pipeline of customers, addressable market and market trends, expected drivers of the Company's growth, anticipated demand for, and expected investments in, the Company's products, services and new offerings, management's expectations as to the Company's future financial performance, outlook for 2012 and future strategies, plans and opportunities.

Such forward-looking statements are subject to risks and uncertainties and, therefore, Retalix claims the protection of such statements contained in the Private Securities Litigation Reform Act of 1995 and other securities laws. Actual results may differ from those discussed today and we'd like to refer you to a more detailed discussion of all these risks and uncertainties contained in today's press release and in the Company's filings with the SEC, and in particular in its Annual Report on Form 20-F filed with the SEC on April 5, 2012.

Also I'd like to remind you that Retalix reported income from operations, operating margin, net income and earnings per diluted share on both a GAAP basis and on an adjusted non-GAAP basis. Today's press release includes a reconciliation of non-GAAP information to the most directly comparable GAAP information and is posted in the Investor Relations section of the Company's Web site at www.retalix.com. The press release showing the second quarter and six month non-GAAP reconciliations can also be found on this site.

Now I will turn the call over to the CEO of Retalix. Mr. Sheffer please proceed.

Shuky Sheffer

Thank you Michal.

Welcome and thank you for joining us on this call.

This morning we announced our financial results for the second quarter and the first six months of 2012.

We had another strong quarter, again recording record revenues and good improvements in operating margins and net income. We are executing on our strategy in a disciplined manner, delivering on our commitments to our customers and winning new programs and logos for our products and services.

The positive response we are receiving from retailers is demonstrated in the wins and the financial results we are reporting for the quarter. It was another consecutive quarter of growth for Retalix.

Revenues increased 18 percent year-over-year to 68.2 million dollars in the second quarter and Net Income Non-GAAP was up 36 percent year-over-year to 5.2 million dollars in the second quarter.

We continue to build across all our lines of business and around the globe. We had more Retalix 10 wins, including another Tier 0 retailer, and good progress with our recently launched Retalix 10 Mobile offering, which also won a Tier 0 retailer. Retalix 10 continues to gain recognition from retailers and industry analysts as the most advanced platform available today on the market.

Our services offerings, including Systems Integration, also continues to generate strong results. This quarter we won a large, multi-year managed services program from a Tier 0 retailer. This is significant in that it is our first managed services contract and demonstrates our success in expanding the long-term strategic relationships that we have with retailers.

Our Connected Payments Software-as-a-Service solution is also performing nicely. We are winning Connected Payments business, including a Tier 0 retailer this quarter, and deploying this offering for a broad range of retailers.

Our wins this quarter, including the managed services deal, highlight the opportunities in our business model. Our model creates value for retailers by combining innovative products and leveraging our unique product and domain expertise with product-led services. We are helping retailers create a fully integrated, multi-channel environment that differentiates their shopping experience for consumers and improves store operations.

In a moment I will talk in more detail about our progress this quarter and how we are working to leverage these strengths to realize the opportunities in the market. Before that let me hand the call to Sarit who will review our financial results in the first half of 2012.

Sarit Sagiv

Thank you Shuky.

Retalix continued its solid financial performance with good results for the second quarter and the first six months of 2012.

Total revenues were up 18 percent in the second quarter to $68.2 million dollars versus $57.8 million dollars in the year ago second quarter. For the first six months of 2012 total revenues are up 20 percent to 133.9 million dollars versus the year ago period.

Looking at the revenue mix in the second quarter, software and hardware revenues were each approximately 10 percent of revenues, maintenance revenues derived from our products were 25 percent, and professional services including our SaaS revenues were 56 percent of total revenues. The fluctuation in license revenues quarter to quarter was expected and as we mentioned on the previous call some of the fourth quarter 2011 wins were reflected in first quarter 2012 license revenues.

We continue to report improving non-GAAP operating margins due to our growth in revenues and careful management of our expenses. We reported a 9.9 percent non-GAAP operating margin in the second quarter versus 8.8 percent in the year ago second quarter and 9.4 percent in the sequential quarter. For the first six months of 2012 we had a 9.6 percent non-GAAP operating margin.

Non-GAAP income from operations was up 33 percent to 6.7 million dollars in the second quarter 2012, versus 5.1 million dollars in the year-ago second quarter. GAAP income from operations was up 28 percent to 4.8 million dollars in the second quarter 2012, versus 3.8 million dollars in the year-ago second quarter.

For the first six months Non-GAAP income from operations was up 31 percent to 12.9 million dollars and GAAP income from operations was up 21 percent to 8.7 million dollars versus the year ago period.

We achieved these improvements while continuing our investments. R&D and sales and marketing remain largely stable as a percentage of total revenues as we work to expand on the market position we have achieved. G&A had a small dollar increase related to the broad range of activities and new contracts signed in this quarter.

Our total headcount remained at over 1,560 this quarter, largely stable versus the first quarter.

We recorded financial income of 0.7 million dollars in the second quarter which includes interest income, the net impact of currency fluctuations on the value of our non-dollar assets, and currency translation costs. This compares to financial income of 0.4 million dollars in the second quarter of 2011.

Turning to our net income, we reported strong year-over-year gains in our net income both on a GAAP and non-GAAP basis.

Our non-GAAP net income was up 36 percent to 5.2 million dollars, or 21 cents per diluted share in the second quarter versus 3.9 million dollars, or 16 cents per diluted share in the year ago second quarter. For the first six months Non-GAAP net income was up 42 percent to 10.2 million dollars versus the year ago period.

Our GAAP net income was up 37 percent to 3.9 million dollars, or 15 cents per diluted share, in the second quarter, versus 2.9 million dollars, or 12 cents per diluted share, in the year-ago second quarter. For the first six months GAAP net income was up 41 percent to 7.2 million dollars or 28 cents per diluted shares versus the year ago period.

Our balance sheet strength continues. This quarter we generated 5.0 million dollars in cash flow from operations, bringing our total to over 142 million dollars in cash and cash equivalents, deposits, marketable securities and long-term investments. We have no debt.

Reflecting the growth in our business total trade receivables increased to 71.6 million dollars at the end of the second quarter. Our DSO also increased to 90 days at the end of the second quarter compared to 88 days in the year ago second quarter and 85 days in the sequential quarter. As we commented in the past, we expect that while entering into larger and longer-term customer contracts, our DSO might increase.

In conclusion, we continued our strong financial performance in 2012 reporting good growth in revenues, operating margins and net income. We have a strong financial platform which will continue to help us in pursuing opportunities in our markets.

Now I will turn the call back to Shuky.

Shuky Sheffer

Thank you, Sarit.

The second quarter was another strong quarter for Retalix as we continue to make progress with our growth strategy. As we said on the first quarter call, 2012 will be a big execution year for us as we build on our successes.

We are leveraging the strengths of Retalix 10 and continuing to generate good interest from retailers around the world for Retalix 10’s unique architecture, true multi-channel capabilities and low cost of ownership. Retalix 10 is clearly the most advanced store suite available on the market. This quarter we had another significant Retalix 10 win with a Tier 0 retailer and we are also making good progress with the other Retalix 10 projects discussed on previous calls. In an age where shoppers have more choice and more information we enable retailers to serve their shoppers with flexibility and short response times across an integrated multi-channel environment.

We are particularly encouraged by the reception we are receiving for Retalix 10 Mobile Shopper. Retailers are excited by the unique capabilities of this solution and appreciate the value of its architecture. It is an example of our strategy of providing innovative solutions for retailers’ most pressing challenges, namely the need to integrate emerging technologies quickly and efficiently into their operations.

With the proliferation of smartphones and the frequency of use by consumers of their devices, it is clear that this channel is of utmost importance to retailers. Our Mobile solution is resonating with many of our customers and we have had several wins, including with a Tier 0 retailer, in the six months since this product was first shown at National Retail Federation conference. What differentiates Retalix is that our Mobile Shopper is not a separate silo application. Like all our other touch points, Retalix 10 Mobile employs the advanced architecture of our central engine.

The ability to sell discreet Retalix 10 components like Mobile, Self-Checkout, Self-Scanning or Customer Service Kiosk is providing us more opportunities to interact with retailers. It also means we can independently implement Retalix 10 components next to existing POS systems providing the flexibility to tailor solutions to each customer’s individual needs.

Our Services business is also creating increasing advantages for us with retailers. This quarter we signed our first managed services engagement. This is an exciting deal for Retalix in which we are providing a range of services, including support and configuration, to a major, well respected Tier 0 retailer. This is a large, multi-year managed services contract for Retalix. Engagements such as this deepen our long-term relationship with customers.

By adding managed services to our offering we can serve the customer’s full IT environment and provide more value to the strategic relationship. It also means that we are providing retailers with choice and flexibility in how they choose to engage our services. In less than two years we successfully built a complete offering of product-led services, ranging from configuration to delivery, deployment, automated testing, support, and more.

Our software-as-a-service Connected Payments offering continues to grow. We won another Tier 0 retailer for our Connected Payments this quarter and we continue to roll out this service to a broad range of retailers.

The retailing market continues to be very active and we are creating a lot of opportunities for Retalix as retailers focus on the store and consumer interaction. We are making good progress executing on our plan, but there are still a lot of challenges in the market and in particular the global economic uncertainties.

Our focus for the second half of the year remains on strong execution and successful delivery on the projects we have won while also working to realize the opportunities we see in the market and consistently manage our growth. We are moving aggressively with our sales and marketing efforts to leverage our market position and realize the opportunities that we believe exist today. We are also continuing our activities to leverage Retalix 10’s leadership as the most advanced store solution on the market. In the second half of the year will we also be making an investment to grow our headcount to ensure successful delivery on our customer wins and that we are consistently providing innovations and value to our customers.

We will be highlighting our thought leadership and the emerging trends in retailing at our upcoming Synergy Users Conference, which will be taking place between October 21 and 24 in Dallas. The Conference will provide us another opportunity to develop retailers’ interest and enhance our relationships with customers, partners and industry analysts. We hope you, our analysts and investors, will also take this opportunity to learn more about our strengths, see demonstrations of our products and meet our customers and partners.

We are gratified by our progress in the first half of the year. Our revenues are trending to the high-end of our guidance of 260 to 270 million dollars for 2012. We also continue to expect improved operating margins versus 2011. Our target is 9 to 10 percent Non-GAAP operating margins for 2012 as we also continue our investments to deliver on our new wins and further build our traction in the markets.

In summary, in the second quarter we again achieved strong financial results and demonstrable progress in executing on our strategy, winning new customers and programs, and delivering good results and innovations for our customers. Our results continue to confirm our positioning and the strength of our strategy focusing on innovative products and product-led services. We are gratified by the strong positive responses we are getting from retailers, our partners, and industry analysts and will continue to work to execute on our programs, deliver strong results for our customers and manage our growth. We thank you for your support and look forward to sharing more successes.

Thank you. Operator we are ready to take questions.

Question-and-Answer Session

[Q&A conducted]

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